FOCUS: As Russia’s Yandex stocks gain, Mail.Ru loses in Jan–Sep, outlook good for both

By Yekaterina Yezhova

MOSCOW, Oct 10 (PRIME) -- Yandex, whose stocks trade both on local and foreign floors, proved to be more resilient to an adverse investment climate and regulatory risks in January–September than Russia’s other Internet behemoth Mail.Ru Group, traded only in global receipts. Analysts said the industry still has growth potential until the end of 2016 as Google’s compliance with antitrust requests will play into the hands of Yandex and promising Mail.Ru Group’s performance in the second half of 2016.

“Yandex’s stocks rose mainly thanks to growing revenue, which adds 10–15% every year. For example, the e-commerce segment, which is one of vectors of Yandex’s development, expands 30–40% every year,” Alexander Kopytov, an investment consultant at Finance Broker, told PRIME.

“The company is good in introduction of new solutions, like online taxi hailing, as soon as a trend emerges. On the other hand, the company still yields the bulk of revenue from search and contextual advertising.”

Yandex’s common shares, traded on the Moscow Exchange, gained 16.9% since December 30, 2015, to 1,341 rubles on September 30. The company’s American depositary receipts (ADRs) on the NASDAQ floor rose 36.4% to U.S. $21.05 in the same period.

The company’s ADRs closed at the end of September almost at the same level as common shares thanks to the ruble’s strengthening, but historically receipts tend to quote higher.

“Western floors have more investors, their capital is larger, and they are more convenient for local players, and the cost of conversion of tools is cheaper. The difference in prices reaches sometimes 20% and is stable for years,” Kopytov explained.

Yandex’s quotes have been underpinned by its loud victory over Google, found guilty and fined by the Federal Antimonopoly Service – the case was opened upon the Russian company’s complaint – for abusing its dominant position on the local market of preinstalled application stores and forcing device makers to embed its programs in a tie-up with Google Play.

Google in September started complying with the antitrust service’s order by notifying users of Android devices of an option to change a default search engine and remove other Google’s programs.

“The unexpected move by Google will trigger a positive reaction in Yandex’s quotes, although we think the key catalyzer of the story would be distributor agreements of Yandex with manufacturers of Android smartphones,” brokerage BCS said in a research note.

VTB Capital’s analysts also said that Google’s first steps to implement the antitrust service’s requirements are positive for Yandex, which has seen its share on Android down at 40% since July–September 2015. “If Google amends its contracts with original equipment manufacturers, Yandex’s share on Android devices might gradually start to recover,” they said.

The antimonopoly watchdog is waiting until Tuesday for documents from Google to confirm mending of all the breaches.

Kopytov at Finance Broker said that the Google case is reaction to a new phenomenon, a large-scale business in the Internet. “Such business is becoming profitable, and turnover is swelling. Since Google is headquartered in the U.S., it pays taxes there, which raises strong disagreement from the E.U. and Russia,” he said.

Vitaly Manzhos, a senior analyst at Bank Obrazovanie, said the controversial data retention laws – stipulating storage of metadata and content of users’ activities – hit telecom operators more than Internet companies, but could still imply large-scale non-production expenses for the latter.

Quotes of Mail.Ru Group’s global depositary receipts (GDRs), traded on the London Stock Exchange, lost 22.2% since December 30, 2015, to $17.54 on September 30.

Kopytov at Finance Broker attributed the decrease in quotes to worse-than-expected revenue growth for January–June, which Mail.Ru Group released in August, and investor worries about the data retention laws.

Alfa-Bank is optimistic about Mail.Ru Group’s prospects and called the company its “top pick”.

“We think that Mail.Ru’s GDRs reacted to weak January–June financials with only a 46.1% EBITDA margin, which were mostly due to a one-off increase in marketing expenses,” Alfa-Bank said in a research note.

“We expect the EBITDA margin to improve in July–December to 47.8% and estimate 2016 EBITDA margin at 47%, matching the company’s target of 47–48%. Moreover, we believe further (the company’s social network) VK user base growth and monetization could be an upward trigger for the stock.”

(62.3031 rubles – U.S. $1)

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